Management Franchises for Investors: Truths and Myths

There is a saying among investors that buying a franchise is buying a job. Many franchisees—those who own franchises—work long hours at unglamorous jobs for what equates to less than minimum wage while running their franchises.

Still, many investors are intrigued by the success rates in franchising.

"Franchises are typically in business five years after they start—I think the success rate is like 95 percent—whereas startup businesses don't have anything close to that success rate. So you're buying a track record," Phil Brown, an area developer for Sport Clips, said. "The support mechanism...for franchisees is fabulous."

Franchises have a high rate of success in comparison to startup businesses

Franchises are popular among investors for a variety of reasons, but are more often regarded as businesses than pure investments. One of the main draws for investors is the sheer amount of information potential franchisees have available to them—including contact information for current franchisees with the company they are researching—which allows them to conduct careful, detailed due diligence.

"Franchising is the only form of business startup where you can speak with other owners, and even visit other owners, who own the same business as you are considering buying before you invest," Scott Cronk, principal of Murphy Business and Financial Corporation, said.

Further, franchised businesses have proven to be successful, which significantly decreases the risk associated with the investment. "Franchise investors are typically not people who are investing in venture capital or high risk or bio-tech...they kind of have a lower risk tolerance," Jeff Levy, a franchisee of The Entrepreneur's Source, said.

Managing Managers

Many people who are interested in franchising aren't interested in giving up their full-time job in order to operate a franchise.

Thus, investors who want to buy a franchise as a source of cash flow rather than employment ought to consider franchising industries that tend to allow their owners more flexibility by requiring them to "manage managers" rather than each detail of the daily operations of the business, Tom Miller, executive vice president and co-owner of Murphy Business and Financial Corporation, said.

Management franchises appeal to investors with day jobs

Management franchises "allow you to protect your family by keeping your job, but also building a business on the side," Miller said.

"The real hurdle that [management franchises] have is that [people] think they can just stop in for an hour here, or an hour there, and they think that their business is truly going to run on its own," Miller said.

Miller said he recommends that new franchisees spend "as much time as humanly possible, at least for the first year," at their franchise and working with the managers. "That can be a pretty hectic time in your life, because you're working full-time...and managing managers in all your extra hours."

Management franchises are more expensive to purchase and take longer to get started than other franchises, Miller said. "Any time that you're not face-to-face with your business, it's going to cost you more and it's going to take longer."

Actual involvement

Many hopeful investors seek out franchises where their only involvement is the actual purchase, but such opportunities don't exist, Miller said. "It's a myth, an investment franchise," Miller said. "The quickest way to lose your money is to not be involved in the business that you've purchased."

Still, that doesn't mean that franchisees must cut hair if they buy a franchised hair salon. "People who buy franchises very seldom have a background in the business they just bought," Miller said. For example, "hair salon franchises are primarily bought by men, who know nothing about hair other than that it grows on them."

"Your role really is just to manage the project of locating, staffing," Levy said.

However, franchising is "not a passive investment. That's important to understand," Levy said. "Anyone who owns a franchise has some responsibility to work, strategically or directly, with the business."

"The average [hair salon] owner is going to own over four locations. The average hair salon is going to make $50,000 to $80,000 a year," Miller said. "You can build that over a number of years and not leave your current employment because you can manage the managers who run them."

Availability

The strategy is not widespread, but it is possible for investors to purchase and manage a franchise and keep their full-time job. Though limited in number, there are some franchising opportunities that allow franchisees to hire managers and oversee the management of the franchise without participating in the day-to-day business of the franchise.

Management franchises can enable investors to own multiple locations

"Most franchises...require you to work full-time in that business," Brown said. Franchises that don't require owners to work in the franchise full-time "are definitely in the minority...but it's a great opportunity for that person who's really trying to leverage their capital and create a cash flow stream for themselves in the future."

Such franchising opportunities appeal to investors who are already employed and want to be a franchisee and grow a business on the side, rather than devoting all their attention to it. "Franchises that promote 'investor' owners typically mean they will allow you to keep a day job, and the systems tend to allow an investor/owner to manage a manager," Cronk said.

Management franchisees don't get to rest on their laurels, though. "There still is a significant amount of hard work needed to get the business up and running and to achieve profitability," Cronk said.

Ultimately, Brown said, many people are drawn to franchising because, "if you want to go on vacation for three or four weeks, the business does not stop because you're not there, and that, I'm finding, is very appealing to a large number of people.”